Cairns owns 70 percent of the voting stock of Hamilton, Inc. The parent’s interest was acquired...

Cairns owns 70 percent of the voting stock of Hamilton, Inc. The parent’s interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition. Cairns uses the equity method in its internal records to account for its investment in Hamilton.

On January 1, 2014, Hamilton sold $2,500,000 in 10-year bonds to the public at 105. The bonds had a cash interest rate of 10 percent payable every December 31. Cairns acquired 30 percent of these bonds at 96 percent of face value on January 1, 2016. Both companies utilize the straight-line method of amortization.

Prepare the consolidation worksheet entries to recognize the effects of the intra-entity bonds at each of the following dates.

a. December 31, 2016

b. December 31, 2017

c. December 31, 2018

Expert Solution

Carrying value of bond on Jan 1, 2016
Carrying value of bond, Jan 1 2014 (2500000*105%)	2625000
Less: Amortization For 2014 and 2015 (25000005%=125000) (Amortization per year = 125000/10 years =12500) (125002 years= 25000)	25000
Carrying value of bond on Jan 1, 2016	2600000
*Carrying value of 30% of Bond payable (260000030%)**	780000

Gain (loss) On retirement
Carrying value of liability (As per above)	780000
Less: Acquisition cost of bond investment (250000030%=750000) (75000096%)	720000
Gain (loss) On retirement	60000

Carrying value of bond on Dec 31, 2016
Carrying value of bond on Jan 1, 2016	2600000
Less: Amortization For 2016	12500
Carrying value of bond on Dec 31, 2016	2587500
*Carrying value of 30% of Bond payable (258750030%)**	776250

Carrying value of investment, Dec 31 2016
Acquisition cost of bond	720000
Amortization of discount (100-96% =4%) (750000*4%=30000) ( Remaining year =10 year -2 year =8 year) (Amortization per year = 30000/8 = 3750)	3750
Carrying value of investment, Dec 31 2016	723750

Inter entity Interest balance
Interest income
Interest received in cash (750000*10%)	75000
Amortization of Discount	3750
Inter entity Interest income	78750

Interest expense
Interest paid in cash (750000*10%)	75000
Less: Amortization of Premium (12500 per year *30%)	3750
Inter entity interest expense	71250

Date	General journal	Debit	Credit
December 31, 2016	Bond payable	750,000
	Premium on bond payable (7500005%=37500) (37500 /10 year= 3750) (Amortization for 2014,2015 and 2016 = 37503 =11250) (37500-11250=26250)	26,250
	interest income	78,750
	Investment in Bond		723,750
	Interest expense		71,250
	Investment in Hamilton		60,000
	(To record elimination entry for consolidation purpose.)

December 31, 2017	Bond payable	750,000
	Premium on bond payable (26250-3750)	22,500
	interest income	78,750
	Investment in Bond (723750+3750)		727,500
	Interest expense		71,250
	Investment in Hamilton (Carrying value of bond payable Less: Carrying value of Investment) (60000 gain / 8 year remaining =7500) every year this balance reduced by 7500 (60000-7500)		52,500
	(To record elimination entry for consolidation purpose.)

December 31, 2018	Bond payable	750,000
	Premium on bond payable (22500-3750)	18,750
	interest income	78,750
	Investment in Bond (727500+3750)		731,250
	Interest expense		71,250
	Investment in Hamilton (Carrying value of bond payable Less: Carrying value of Investment) (52500-7500)		45,000
	(To record elimination entry for consolidation purpose.)

ekkarill92 answered 1 year ago

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Cairns owns 70 percent of the voting stock of Hamilton, Inc. The parent’s interest was acquired...

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